EIA’s Forecast Is an Energy Fantasy Land

Posted by Jeff Rubin on December 22nd, 2010 under SmallerWorldTags: , , ,  • 20 Comments

The recently released base case that will be used in the upcoming Annual Energy Outlook 2011 from the US Department of Energy’s Energy Information Administration (EIA) paints a future of cheap and abundant energy for the US economy over the next quarter of a century. But its underlying assumptions are no more credible than those that underpinned the equally optimistic forecasts released by the International Energy Agency.

In the EIA base case, electricity prices in the US are basically flat for the next two and a half decades, thanks to cheap natural gas, while oil prices don’t even get close to their 2008 peaks until way off in 2035.

To top it all off, despite this new world of cheap energy, carbon emissions in the US economy don’t grow. (Since the EIA is counting on no less than 5 million barrels per day from the Alberta tar sands, the same cannot be said for the Canadian economy.) American emissions remain below their 2005 peak until 2027, even though no caps or trade policies are assumed to exist, and even when the agency is forecasting an almost 30 per cent increase in national coal consumption over the period.

With fossil-fuel energy abundant, and carbon emissions remarkably self-contained, the forward-looking EIA expects only a marginal increase in the contribution from renewables, whose very viability is challenged in the absence of public subsidies.

A doubling in estimates of shale gas reserves drives much of the energy abundance the EIA predicts. Whether shale gas turns out to be the game-changer the agency claims or the gas industry’s version of the subprime mortgage market will ultimately depend on where its true cost curve lies.

If it’s really in the neighborhood of $4 per 1000 cubic feet (Mcf) then there is enough gas to keep the lights on in America for years. But if the true cost curve lies closer to $8 per Mcf (even before environmental costs like local groundwater contamination are factored in), then gas may not be as abundant as the EIA believes, and long-run electricity prices may not be nearly as cheap as forecast.

Either way, as I noted months ago in my post about Boone Pickens’ plan, shale gas doesn’t address the emerging shortage of the liquid fuel that is needed to power the 250 million vehicles or so that run on US roadways.

Which bring us to the EIA’s oil price forecast. Measured in today’s dollars, the agency doesn’t see oil getting to $125 a barrel until 2035. The $125-per-barrel oil price that the EIA has spotted on the very distant 25-year horizon, I believe, will actually be staring the agency in the face within the next twelve months. I leave it to others to assess what that will imply for the credibility of the rest of the EIA’s outlook.

  • Rojelio

    I'm curious, what's the EIA's motive for putting out flawed information?

  • Oil Sceptic

    It seems this EIA report is once again a political document that attempts to calm markets and undermine the oil price.

    But with WTI hitting $90 today, and the more globally representative Brent price at nearly $94 (!), it seems the EIA efforts are in vain.

    Oil looks quite likely to hit triple digits in 2011, just as Jeff predicts.

  • Shirley

    You're right, Oil Sceptic — anyone who's been tracking the price of crude through this recession (and it still feels like one to most ordinary people, despite the Wall Street recovery) can see the undeniable and mostly steady upward trend. If the “real” economy ever does spring back to life, you can count on quickly seeing triple-digit oil prices. The EIA's outlook is outlandish.

  • rod

    as someone said, “the solution to expensive oil, is expensive oil”. Maybe they are both right — personally, I'm in Jeff's camp and invest accordingly.

  • rojelio

    I don't get it. what does that mean?

  • zeke12

    It appears to me the name of the game is to keep Americans “fat, dumb and happy”. Doesn't seem too hard to do. Rarely do I encounter anyone able to carry on anything resembling an intelligent conversation. People wanting to whine, complain and blame are everywhere.

  • Andy

    Rojelio, I think what Rod implies is that we will not pay attention to or look to address any remedies to the problems of expensive oil until oil is actually expensive. More interesting to me is…. Rod, where specifically then do you invest? Andy

  • Remi

    If US defaults on their debt in the near future, then yes, GHG emissions have peaked, demand and prices will fall for a nice long while… So their cost and emissions scenarios might be okay, but it would mean that their consumption scenarios would be way off.

  • practical idealist

    The poor of mind will always be with us and waiting for time to prove them wrong just to say “I told you so,” is no consolation. The challenge for us remains to refine and define Plan B. I'll say this Jeff, you came close.

  • Flexfix

    The EIA is a mouthpiece for the oil industry that fears competitors: electricity and ethanol. The oil price could be dropped below $60 by offering a viable ethanol alternative. This could be accomplished by mandating flex fuel cars and getting rid of the tariff on ethanol. The only purpose for the tariff is to make oil companies and legislators rich. Oh yes and OPEC.

  • Syntope

    $200 oil makes perfect sense when you realize the U.S. is printing paper to pay for it. I don't think it has anything to do with supply and demand… it has to do with paying for it with inflated paper. Why would it and everything elsego up… Same applies to stocks.

    Also transit fuel options are not limited to NGL.. The real answer is compressed NG.. that is where the value and the supply is.

  • EdChessor

    If Al Gore and his sources were right about the link between sea levels and melting polar ice, then what happened in New Orleans in 2005 (Katrina) will happen again. It will happen in London, Amsterdam, Vancouver BC, Honolulu and a few hundred other cities that are close to sea level, only the flood waters will not go away. Many of the world's airports will find their runways are under water at high tide, then all the time. Travel related consumption of liquid fuels will go way down, because a large portion of the infrastucture will be out of service. A lot of roads and streets will be flooded, along with the airports.
    If we reason through that scenario, oil prices may not rise all that fast. In the USA, gasoline and diesel prices may go up much faster due to refineries near the Gulf of Mexico being flooded. As I understand it about 60% of US refining capacity is there.
    Ed Chessor

  • Abitibidoug

    The only way the EIA's optimistic predictions will come true is if the whole world goes into a long and deep double dip recession which is so bad it not only cuts demand for energy here but also in upcoming big energy users like China and India.

  • UNC

    Once again Jeff , I will go with your say ,there are many things that can happen overnight to the supply of traditional energy sources that the EIA does not calculate into their formula ,if I was on this calculus team at the EIA , me thinks we should have another gander at it, they bank on energy from their northern cousins , but economics rule and commodities will follow the least path of resistence, one only has to look at softwood lumber out of B.C. we have now sold more over yonder than we have in the traditional market this year , this can, if need be, in a global economy , a bit of a game changer in my mind . We respect and like our cousins to the south, but respect for each others countries and cultures should work both ways and when arrogance overides the basics of the free market system there will be some friction . Mind you, who ever said that cousins get along perfectly. UNC. ft st john B.C. Canada.

  • cleitophon

    It is simply incredible how the IEA gets off scott free publishing such outlandish prospects for oil prices, in fact providing legitimacy to all the governments who don't react in the face of blatantly malthusian circumstances. Every other individual on the planet sees oilprices exploding over the next two years:


    Not only that, this course of events seems to be in complete correspondence with the US military report on peak oil:

    “”By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day,” says the report.”


    I come to think of the trial of Galileo Galilei, where the church absurdly and for political reasons insisted that the earth was the center of the universe:

    “My dear Kepler, what would you say of the learned here, who, replete with the pertinacity of the asp, have steadfastly refused to cast a glance through the telescope? What shall we make of this? Shall we laugh, or shall we cry?”
    –Letter from Galileo Galilei to Johannes Kepler

  • Just a guess

    Actually US ethanol is subsidized so but of course there is a tariff on Brazilian ethanol. while it is good for increasing octane, our corn ethanol is useless as an oil replacement. Importing it would help only if it were cheaper than oil. The government mandate to offer 15% ethanol blend is wacky in that regard and well as having special pumps since most cars would be damaged by it.
    Our transportation future will be downscaled a lot (food grown locally and imported goods very costly) and will be electrically driven. If we can manage to transition to Thorium nuclear power plants in addition to renewable electricity, then we can have oil for plastics, medicine and lubricants. I don't think our modern society (even on a simpler level) can survive while burning it up in cars and trucks. There is a possible medium term solution to help with liquid fuels and that is being developed by Carbon Sciences. However, it has to be proven to be cost effective but this may happen soon.

  • Rhadamanthus

    What is sure to disappear by 2012 is the notion of global warming and the belief that CO2 is the cause. By then politicians will be fleeing the warmist camp in droves and looking for scapegoats. The greenies will be called by the Reps. to substantiate their case by scientific merit and they can't. The fraudulent data sets will be exposed as the price of gas in the US heads for $5.00/gal. The backlash of the American citizenry will lead to riots and possibly assassinations of people/politicians/warmists believed responsible. Drilling in Anwar/California offshore/Gulf of Mexico will accelerate as fear grips the politicos. All hell will break loose and I expect to monitor it prior to December 31,2012. In the following years oil prices will collapse.
    Invest accordingly. Never believe an expert!

  • Rhadamanthus

    Over the longer term the EIA's measured study is most likely to play out. Short term hysterics improve book sales, nothing more.

  • cleitophon

    @ Rhadamanthus

    Whatever the causes, global warming is obviously real



    Now, whether your motivation is reducing emissions to save the climate or conserving energy to save society, the approach is the same: burn less fossil fuels. The two issues have the same solution: leave the keys to you SUV and start living locally.

    Incidentally, your idea of new drilling is a pipe dream in the face of exponential growth. I come to think of Bartletts thought experiment involving bacteria that grow through doubling once a minute i a bottle: 1, 2, 4, 8, 16… ect. At 11am the bottle has one bacteria and at noon it is full. When is the bottle half full?? Not at 11.30, but at 11.59. And when do you realize that you are running out of space? At 11.55 the bottle is still only 3,1% full! Bartlett has our bacteria on a search for new bottles at 4 minutes to noon, and they find 3 new bottles – more space than they have ever had before. Wonderful liberating space, So, he asks: how long till all the new space is spent? Well, at 12.01 two bottles are spent and at 12.02 four bottles are full and at 12.03: malthusian death, cause next doubling would require 8 bottles. Exponential growth is a killer, exactly because it involves small amounts to begin with, but towards the end these amounts become enormous.

    People just don't get it: in the face of exponential growth, finding the equivalent of a new Al-ghawar means nothing, cause in one doubling time of the exponential function there is used just as much as in the whole history of industrialisation. That means if oil use grows at for instance 4 % per annum like the target for gdp growth in the west, doubling time is just over 17 years!!!!


    In 17 years we would use the same amount of oil as in the whole history of industrial society.

    At depletion rates running around 5-10% and demand surging forward with 3 % a year, giving a differential of between 8 and 13 % you do the math. At that rate the distance between depletion and demand is gonna double every 5 to 9 years.

    Now if some greenies are interested in reducing emissions you run with it rather than complain, cause we need all the time we can get to prepare.

    If you are convinced by the data for peak oil, why the hell spend your time complaining about global warming – it makes no sense. The two have the same solution: use less oil!

  • john doe

    what percentage of the total co2 production is from automotive exhaust ?? less than 10% right ??

    Why does temperature rise before co2, not the other way around ??

    why has co2 risen 30% but methane risen 130% ?? which gas has the greatest greenhouse effect ??

    driving more fuel effecient cars is irrelevant to global warming !!